Interview with Niall Ferguson: Taking the long view

Interview by Gene Zasadinski, managing editor of View magazine.

In trying to make sense of the present, author and commentator
Niall Ferguson gives a great deal of thought to the past—both the
past as it was and the past as it might have been. “That’s what
historians do,” he says. “That’s what sets historians apart from
economists.” In this interview, Dr. Ferguson brings this unique
perspective to the major issues of the day—financial, economic,
and political. As a student of empire, he also offers his views on
why civilizations rise, fall, and, possibly, rise again.

Niall Ferguson is a professor of history at
Harvard University and a professor of business
administration at Harvard Business School.
He is also a senior research fellow at Jesus
College, Oxford University and a senior fellow
at the Hoover Institution, Stanford University.
A prolific writer and sought-after commentator,
Dr. Ferguson is a frequent contributor to
major print and online publications, including
Newsweek and thedailybeast.com. His most
recent books are The Ascent of Money: A
Financial History of the World, and Civilization:
The West and the Rest (available in the US on
November 1, 2011).

GZ: In your new book, Civilization: The
West and the Rest,¹ you use a computer
software metaphor to make the case that
global Western dominance resulted from
what you call six killer applications.
Would you explain?

NF: Yes. The “killer apps” model as a
metaphor is a very useful way to answer
the big question about the history of the
world after 1400: Why did the great civilizations
of the East stagnate while a few
little warring kingdoms in Western Europe
took over the world? After a lot of thought
and study, I concluded that there were
really six factors, or applications, which,
taken together, explain Western ascendancy:
competition in both economics
and politics; Newtonian science; the rule
of law and, in particular, private property
rights; modern medicine and the resulting
increase in life expectancy; a consumer
society that led to an Industrial Revolution;
and, finally, a strong work ethic.

GZ: What about democracy?

NF: If by democracy you mean a system
of government where elections are held
regularly for legislatures or executives, I
don’t think that’s actually a killer app. Lots
of countries have elections with universal
suffrage. Some do well, and some don’t.
The critical things, in my view, are the rule
of law and the notion of private property
rights. Those are more important than
democracy. In any case, democracy’s quite
a late phenomenon. Great Britain didn’t
achieve universal suffrage, including
women, until well into the 20th century,
by which time Western primacy had been
long established. It’s way too late, really,
to be that important.

GZ: Does the West still have exclusivity
regarding these applications, or is it being
challenged by other cultures?

NF: Part of the reason for writing the
book was the growing sense that Western
predominance was coming to an end on
our watch, and it’s the peculiar fate of
our generation to see that happen. I think
there are two things going on here. One
is that non-Western countries are replicating
Western models. They are, in a sense,
downloading these apps. The second point
is that like real software, these apps can be
deleted or corrupted. And when you look
at some European countries and at certain
aspects of the United States, you see a
civilization in which there is at least some
corruption on the hard drive. One sees
that very clearly in a whole range of areas,
including a decline in the work ethic and
a rise in entitlements, for example. Such
changes represent a fundamental shift in
the West, away from the core institutions
and values that lifted it into a position of
power in the first place.

GZ: Is there any hope of getting that
power back?

NF: Yes. To continue the metaphor, these
applications can be upgraded. The antivirus
software can be run. They don’t stop
working by some natural process of decay,
and I think reform is possible.

GZ: You define yourself as a historian
rather than an economist, though your
specialty is economic history. How does that
shape your thinking and differentiate your
perspectives on these and other matters?

NF: I think there’s an important intellectual
difference between what economists do
and what historians do. Economists are in
the model-making business. That’s really
what they do. Historians accept the
complexity of the human world and doubt
that it can be simplified into a model.
And some historians—by no means all—
engage in thought experiments in which
they construct alternative histories—what-if
scenarios, if you will—to try to understand
the causal sequence of the one history that
did happen.

GZ: So, let’s apply the economic
historian’s perspective to events currently
unfolding on the world stage. How is
unrest in North Africa and the Middle East
affecting American and other Western
economies?

NF: At this point, the impact is fairly
minimal in the US, although, of course, it
is one reason that the price of gasoline is
higher than it was a year ago. Its impact
in Europe is more immediate, because
two things are happening. One, people
are leaving the region, so the migration
problem has become very acute. And two,
money is leaving as well. The wealthy
of the Arab world are extremely nervous
about what is happening, and we’re seeing
enormous flows of capital out of countries
like Egypt into Switzerland and into
London. So there are impacts already, but
my sense is that we haven’t yet seen the
full impact, because this is a revolutionary
crisis at a relatively early stage.

GZ: What do you mean?

NF: As history teaches us, most revolutions
of this kind play out over years and
take place in four phases. In phase one,
there’s an almost festive air of excitement
when the tyrant is toppled. In phase 2,
the economies go into freefall, because
the money is pouring out of the country,
creating opportunities for political radicals.
In phase 3, there either is a shift toward
restoration, or the radicals manage to gain
control of the political process. My outlook
is somewhat pessimistic about this.

GZ: And what is the fourth phase?

NF: In the fourth phase, you end up with
war. There’s already a war in Libya, but
the war we really need to worry about is a
Sunni-Shiite war. That could send oil prices
skyrocketing, which would obviously have a
serious impact on the global economy and
on the strength of any economic recovery.

GZ: Political unrest aside, what else can
history teach us about economic crisis and
recovery? Is what we’re going through now
similar to what has occurred in the past,
say, Japan in the ’90s or even further back?

NF: Well, I think that’s exactly the right
kind of question to ask because the best
way to understand a financial crisis or an
economic depression is by comparing it
with others. Economists are generally fixated
on a few well-known disasters, of which
the Great Depression is the best known by
far. My feeling is that it’s better to locate
these events in a much longer-term perspective
that can take you back at least as far as
the late 19th century, which was the first
great age of financial globalization. And we
can learn as much from looking at the Great
Depression of 1873 to 1878 as we can from
looking at 1929 to 1932, in that the former
is in many ways closer to our experience
than the latter. In 1873, a huge financial
crisis occurred on both sides of the Atlantic,
and it had its origins in real estate. Many
banks failed. But globalization didn’t break
down. It slowed the growth of economies,
but it didn’t cause anything like the collapse
that occurred in the early ’30s.

The Tea Party is a classic populist movement, and it has much
more in common with movements in the late 19th century
than with what happened in the ’30s.

GZ: Are there other ways in which this
earlier crisis was similar to our own?

NF: Yes. Like today, populism became a
big part of politics after the 1870s, and the
backlash against the crisis was very powerful
in both Europe and the United States.
The Tea Party is a classic populist movement,
and it has much more in common
with movements in the late 19th century
than with what happened in the ’30s.

GZ: So from your perspective, are we
in a recovery?

NF: I think we are. It’s a very fragile
recovery in the United States, and it’s a
very unimpressive one in Europe. And,
again, much can be learned by looking
back. In the 1870s, there was a five-year
period of subpar growth that went on until
1878, and deflation continued after that
for more than a decade. I think we should
bear in mind, therefore, that this could all
last longer than most of us are conditioned
by our own life experiences to expect.

GZ: What are the key factors affecting
the recovery?

NF: There are two problems. The first and
most serious is the fiscal crisis that has
been left in the wake of the banking crisis.
And the second is the massive printing of
money—the monetary stimulus that was
given the appalling euphemism, quantitative
easing.

GZ: What are your concerns regarding the
fiscal crisis?

NF: My concern is that we’re only at the
beginning of a very painful process in
the United States—that of addressing this
problem, which is partly structural and
partly cyclical, but very large and very
politically intractable. Europeans are further
down this road, and some European
countries have come spectacularly to grief.

GZ: And quantitative easing?

NF: The problem is that if you print money
almost without limit and hold interest rates
at zero, you will get inflation. And that
is happening. It’s hard to detect, because
inflation doesn’t begin with a bang. It’s very
stealthy. It creeps up on you. But a moment
of truth is coming. It’s going to be a moment
when we decide either to go further
down the inflationary road, or we apply the
brakes, both fiscally and in monetary terms,
and experience a fading of the recovery.

GZ: Can inflation ever be a good thing?

NF: It was certainly the belief of a generation
of Keynesians in the 1950s and ’60s
that a little inflation would oil the wheels
of the system. What they were really saying
implicitly was that it would be better
to have negative real rates and transfer
resources stealthily from savers to borrowers.
But the benefits of inflation are usually
outweighed by the costs as the inflation
problem builds. Everything that we know
about the history of inflation says it’s hard
to stop, though it’s easy to start.

GZ: Is it right to equate inflation to the
Consumer Price Index (CPI) or core CPI?

NF: I think that your readers need to
ponder how anachronistic our thinking is
when we define inflation as the Consumer
Price Index, or, possibly, core CPI.

GZ: Why is that?

NF: The experience of inflation differs
between those whose expenditures are not,
in fact, concentrated that much on essentials,
and those whose expenditures are.
For example, the dramatic fall in the cost
of personal computing might lead some to
conclude that inflation is really low. But
those who are relatively poor and worried
about food would conclude the opposite
because they’ve been hit by a doubling of
prices in many foodstuffs in the last two
years. Also, the CPI deliberately ignores
the extraordinary ups and downs in the
asset markets—housing prices, for
example. In the very blinkered world of
monetary policymaking, CPI or core CPI
is the thing that you implicitly target. And
if somebody says, “Hey, what about asset
prices?” the answer is, “Get thee behind
me, Satan!” I sense a growing disbelief in
the official mantra that inflation is low,
possibly even too low.

GZ: A debate going on in the US right now
concerns the magnitude of spending in light
of growing deficits. What are your views?

NF: For the last seven or eight years, I
have been warning that the United States
was on an unsustainable fiscal trajectory,
particularly because of unfunded liabilities
in Medicare and Social Security. If Americans
are to keep federal expenditures at 18
or 19 percent of gross domestic product,
significantly below the comparable figures
for Europe, then government will have to
shrink. But here’s the bad news. You are
going to have to dismantle Medicare as it’s
currently constituted, and a whole bunch
of other discretionary and nondiscretionary
programs will have to be drastically
reduced. The debate between big and
small government is beginning, and I think
that’s great.

GZ: So what should Americans be doing?

NF: I think Americans should fundamentally
rethink their welfare model, their
approach to Social Security, and healthcare
reform. And Americans should be worried
that they have such large, long-term unemployment.
My own view is that the United
States would be making a big mistake by
becoming a European country. And that’s
a real risk. This country is not a kind of
giant transatlantic European Union. Its
energy and its success have derived in large
measure from the dynamism of its private
sector. It’s really something quite different.

Perspectives

Niall Ferguson on . . .

Money and trust

I associate money and trust with a particular way of running financial institutions. In the
19th century the prudence of the banker and the privacy of the client were givens, and
the relationship between banker and client was based on mutual trust. We’ve come a long
way from that world. I think the breakdown of trust in financial institutions is a huge
problem. If the banks are no longer trustworthy, then it’s very hard for the financial system
to function. But we have to recognize that trust has implicitly shifted to the governments
that bailed out the banks. The problem is, if you can’t trust the banks and you can’t trust
the government, what’s left? I think there is a kind of simmering disillusionment with the
system that is partly what fuels populism. Many people feel that the system is, in some
measure, corrupt and that’s a very unhealthy state of affairs.

Tax reform

We urgently need tax reform in almost all Western countries, and we should aim for
simplicity, clarity, and equity. Currently, there are all kinds of absolutely unjustifiable
loopholes and deductions, and these have to go. It would be tremendously good to
have a simpler system in which the form that you fill out is a couple of pages long, and
everybody understands it. I think that would unleash two percentage points of GDP
growth and help solve the fiscal problem in its own right.

Social networking

There’s a default assumption that social networking is good, and in particular, that it is an
agent of Westernization or of democratization. The problem with that assumption is that
at best this technology is politically neutral. It can be used equally well by those who are
profoundly hostile to freedom. Further, networks aren’t always social. You could have a
sociopathic network that serves to promote the cause of political violence. But the worst
danger is that the networks on which we grow so reliant are vulnerable to cyber attack.
And an attack on the network is a perfectly credible scenario and the kind of thing that, if
I were targeting an enemy, I would be aiming to do. Ironically, history teaches us that the
status quo power is generally not that good at exploiting new information technology and
tends to use it for trivial purposes. The established authorities in France in 1789 had no
idea how to manage the press, but the revolutionaries did. So I think, rather than just being
neutral, new communication networks, broadly speaking, favor revolutionaries, because
the revolutionaries have an aim.

Clash—or mash—of civilizations

Some think we are experiencing a clash of civilizations. But I don’t agree. Such thinking
assumes that there is only one modern civilization. It does not account for the fact that the
advances of a modern civilization, particularly in technology, can and are being co-opted
by the less modern. So I prefer the word “mash” to “clash.” I think what’s really impressive
about the 21st century scene is that most all civilizations now have access to powerful
tools for communication. So, the differentiating factor is not so much about modernity.
Rather, it is about how and to what purpose these tools are being used.